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The entirety of Rosetta Stone's (NYSE: RST  ) conference call felt like a huge therapy session. CEO Tom Adams finally admitted that free or low-priced competitors were cutting into profits. Fellow education stocks face similar pressures, including Blackboard's (Nasdaq: BBBB  ) competition from open-source option Moodle. Worse yet, Rosetta Stone must also contend with other for-profit options such as CBS's (NYSE: CBS) Pimsleur.

Adams also shouldered responsibility for the awful advertising campaign that's gotten the company caught between a rock and a hard place. The only question that remained: Can any real strategy help this company fulfill its potential?

Why the dive?
I've written about Rosetta Stone several times before; the company is a compelling investment that aims to profit from the worldwide need to learn languages, namely English. In addition, as a former teacher, I see vast potential for the product in the institutional/educational sector.

All of that is fine and dandy, but right now, the U.S. consumer market makes up the great bulk of Rosetta's revenue -- 64%, to be exact. It seems that spot TV ads were driving consumers to give the product a try during the Great Recession. The company notched as much as a 22% increase in consumer revenue until the second quarter of 2010.

Then Rosetta Stone announced Q2 earnings, and revenue fell off a cliff. The rising cost of U.S. advertising seems to be the culprit, as the TV ad market recovers from its post-recession lows. Rosetta Stone now spends more money on advertising than it did a year ago, while getting just 40% as many TV impressions.

Enormous potential
The negativity that the U.S. consumer market brings is tempered -- though lately, not much -- by the international and institutional potential the company has. Adams mentioned during the conference call that Rosetta is a product for serious language learners, not dabblers. U.S. consumers don't have nearly the same motivation to learn a language as someone does abroad. As Adams put it, to them, learning English means bread, not cake.

The results from the fourth quarter were extremely positive for both sectors. Institutional revenue not only continues to grow, but has also accelerated, up 37% year over year. International revenue rose 92%.

Can they make it?
Although it'd be nice to see the U.S. consumer market make a full-fledged comeback, I'm not betting on it. But I'm not selling my shares, either. In my view, the company needs to figure out a way to squeeze as much out of the consumer market as they can before International and institutional buyers take over and carry the company into the future.

What kind of things does RST aim to do to beef up U.S. consumer spending?

  • Spending their advertising money at a more directed audience
  • Changing product offerings and, as a result, prices
  • Making content downloadable

Certainly, if things pan out for this company, it could be a huge success. But investing in RST is risky too, so if you buy in, be sure it's within a well-diversified portfolio.

Fool contributor Brian Stoffel owns shares of Rosetta Stone. Blackboard and Rosetta Stone are Motley Fool Stock Advisor recommendations. Blackboard is a Motley Fool Hidden Gems choice. Try any of our Foolish newsletter services free for 30 days.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 11, 2011, at 11:56 AM, zakaro1000 wrote:

    recommended with best marketing skills on feb 15th from david gardner, and check how it plummeted a few days later.

    now you suggest to sign up for more advice..

    who are you trying to fool anyhow..

  • Report this Comment On March 13, 2011, at 9:11 PM, midnightmoney wrote:


    Thanks for the fine article. Would you please elaborate on the relationship between your status as a former teacher and rosetta's potential as a stock investment? Do you see them filling a role that teachers don't, and if so, exactly how? As a former teacher myself, I have grave doubts about the company's potential.

    I have asked around quite a bit in Poland, where people are (though not as much as in the past) convinced that learning English will put them on the fast track to career success, but nobody has heard of rosetta stone. Is that because they haven't broken into the market here, or because there is such an incredible amount of competition in Europe when it comes to language learning aids that no one company could possibly stand out? I'm thinking of the ubiquity and long arms of oxford and cambridge universities as well as longman press.

    My experience here was that what motivated people to learn languages was exams, especially those from cambridge univeristy. Does rosetta stone somehow prepare students to deal with the cae or ielts or toefl exams, or are they going after the smaller percentage of people (at least in Europe) who don't aim to pursue one of those, however likely that may be? Thanks again.

  • Report this Comment On March 14, 2011, at 11:41 AM, brewersfan81 wrote:


    Thanks for the thoughtful response. As far as the program goes in schools, my main conviction is that the software is effective and that the immersion method works. You could give the product to a 50 year old or a five year old, and both will be able to move at their own pace, and benefit from the program. I don´t know what it´s like in Poland, but in the States, there´s both a shortage of money to pay for foreign language teachers (RST is cheaper than a salaried teacher), and a shortage of actual foreign language teachers.

    I can tell you that right now, RST isn´t focusing too much on Poland. They currently have offices (which are getting quite a bit of business) in Germany, the UK, Japan and South Korea. They will be expanding into either Brazil or China by the end of this year.

    As far as preparation for tests, that´s not something I know about. RST may offer it, but if they do, I´m unaware.

    Brian Stoffel

  • Report this Comment On March 15, 2011, at 12:57 PM, GregJLanguageGuy wrote:

    Rosetta Stone's problems should be easy for anyone understand:

    -At retail they are outsold by the Instant Immersion line from Topics Entertainment. That line costs about $450 less than RS and gets very similer reviews on Amazon and Topten

    -For really serious language learners, a language class is the only real way to go.

    -On line there are lots of free language learning sites going up and already established.

    What people fail to understand with RS is that huge amounts spent on advertising will never work in the long run unless the product really is better than the competition. And, clearly, its not!

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